Institutional Investment Lineups May Have Reached Their Smallest

The latest market report from Insight Investment, titled “U.S. Market Is Ripe For Disruption From Multi-Asset Investing,” shows 57% of institutional asset owners surveyed indicated that they anticipate expanding the number of investment managers they work with in future, compared with 20% who expect to work with fewer firms.

According to researchers, the increasing popularity of multi-asset investing among U.S. institutional investors is among the main sources causing market disruption. In fact, Insight Investment suggests the “perception that institutions are generally keen to cut their manager rosters and to shift from active to passive strategies” is perhaps no longer the dominant trend.

“In our view, this study clearly indicates that U.S. institutions are searching for new opportunities and strategies that can target returns that meet their goals, while at the same time demanding more sophisticated risk management approaches,” the firm reports. “In total, 67% of those surveyed already have a meaningful allocation to multi-asset, and a substantial proportion of respondents, 19%, indicate an intention to evaluate a multi-asset manager in the future.”

As laid out in the report, flows into multi-asset funds are less likely to come from investors’ alternatives allocations, with 84% of respondents indicating they have funded (or expect to fund) their multi-asset allocations with dollars directed away from conventional active equity and fixed income allocations.

“The allocations being made are substantial, with the majority of respondents establishing a weighting between 5% and 15% of their total assets,” researchers notes. “Investors seemingly want their assets to keep working hard, but with an emphasis on risk-managed solutions, greater transparency, higher liquidity, and lower fees.”

Of course, this combination of objectives is nothing new to the institutional investing marketplace. But what is new, researchers argue, is increased product innovation—and clients’ willingness to blur the traditional lines between active and passive management. The report goes on to highlight how the qualities of the investment manager running the multi-asset strategy is critical to the outcomes of ongoing investment choices being made by institutions.

“In this respect, respondents are seeking out managers with proven robust risk management capability and firms with a partnership and solutions mindset,” the research concludes. “The results highlight one watch point for the industry. In multi-asset, perhaps more so than other asset strategies, it is typical for respondents to use multiple benchmarks and measures to assess performance, with around three selected on average by the survey audience. This runs the risk of investors losing sight of the primary goal and benchmark, potentially leading to disappointment, managers straying away from their core processes or managers cherry picking results that present them in a favorable but ultimately misleading light.”

To counter these potential risks, Insight Investment recommends multi-asset managers (and institutional clients) need to “stick to their process,” and investors “should judge their multi-asset strategies based on a single, primary benchmark and the most relevant assessment measures as agreed with the provider.”

Additional findings from the report are available here.